General Finance Corporation
Q1 2016 Earnings Call Transcript

Published: 9 Nov 2015

[Operator:]

Welcome to General Finance Corporation's Earnings Conference Call for the First Quarter ended September 30, 2015. Hosting the call today from the company's corporate offices in Pasadena, California are Mr. Ronald Valenta, President and Chief Executive Officer of General Finance Corporation and Mr. Charles Barrantes, Executive Vice President and Chief Financial Officer. Today’s call is being recorded and will be available for replay beginning at 1

[Chris Wilson:]

Thank you, operator. Before we begin today, I would like to remind you that this conference call may contain certain forward-looking statements. Such forward-looking statements include, but are not limited to our views with respect to future financial and operating results, competitive pressures, increases in interest rates for our variable rate indebtedness, our ability to raise capital or borrow additional funds, changes in the Australian, New Zealand or Canadian dollar relative to the U.S. dollar, regulatory changes, customer defaults or insolvencies, litigation, acquisition of businesses that do not perform as we expect or that are difficult for us to integrate or control, our ability to secure adequate levels of products to meet customer demands, our ability to procure adequate supplies for our manufacturing operations, labor disruptions, adverse resolution of any contract or other disputes with customers, declines in demand for our products and services from key industries such as the Australian resources industry or the U.S. construction and oil and gas industries or a write-off of all or a part of our goodwill and intangible assets. These involve risks and uncertainties that could cause actual outcomes or results to differ materially from those described in our forward-looking statements. We believe that the expectations represented by our forward-looking statements are reasonable, but there can be no assurance that such expectations will prove to be correct. For more details regarding these risks, please see the Risk Factors section of our periodic reports filed with the SEC and posted to our website at www.generalfinance.com. These forward-looking statements represent the judgment of the company at this time and General Finance Corporation disclaims any intent or obligation to update forward-looking statements. In this conference call we will also discuss certain non-U.S. GAAP financial measures such as adjusted EBITDA. A reconciliation of how we define and arrive at adjusted EBITDA is in our earnings release and will be included in our quarterly report on Form 10-Q. And now I turn the call over to Ron Valenta, President and CEO. Ron, please go ahead.

[Ron Valenta:]

Thank you, Chris. Good morning and thanks for joining us to discuss General Finances result for the first quarter of fiscal year 2016. As in our prior earnings call I will begin with a brief discussion on our operations and then I will provide an update on our outlook for the remainder of the fiscal year. Our CFO, Chuck Barrantes will then provide a financial review and following his remarks we will open the call for your questions. Despite the dual headwinds of the soft oil gas sector and a decline of the Australian dollar relative to the U.S. dollar we continue to pursue our strategic goals of geographic expansion and market diversification. While our financial results declined when compared to last year's strong first quarter we saw some positive indicators during this year's first quarter including a sequential increase in adjusted EBITDA at our North America leasing operating and are continuing to see attractive bolt-on acquisition on opportunities across both of our geographic venues. Our North America leasing operations continue to experience healthy demand in the majority of end markets and product lines apart from the oil and gas sector where during the first quarter four of five Top Five sectors representing approximately 60% of our leasing business saw combined 17% increase in leasing revenue compared to the prior year's first quarter. Additionally the majority of our product lines in North America experienced strong fleet utilization with and/or higher average lease rates during the quarter as compared to the first quarter of 2015. In addition to organic growth we have continued to focus our efforts on accretive acquisitions of portable storage container businesses and last month we acquired a portable storage container business in the Seattle, Tacoma area where approximately $15.5 million during this fiscal year's investment in the two North America acquisitions to approximately $17 million. Further we added three new greenfield branches in Lexington, Miami and [indiscernible]. Even with our extensive geographic presence in North America, today we still only have presence in 36 of the Top 50 MSAs in the country demonstrating a potential for future expansion. Our liquid containment business in North America had another challenging quarter on a year over year basis due to the lower level of drilling and completion activity in the oil and gas sector. That being said we’re realizing benefits from our stringent cost controls and focus on growing our business with new and existing customers while also expanding our geographic reach. Lone Star whose business is solely in the liquid containment sector in Texas generated adjusted EBITDA nearly 3 million in the quarter which wound down significantly from last year's first quarter was up sequentially from $500,000 in last year's fourth quarter. Our Lone Star team has done a great job in a very challenging environment and is working diligently to build upon this positive momentum at quarter's ahead. The Permian Basin which is where Lone Star conducts the majority of it's business is actually seeing increased interest from oil and gas producers as it still offers the best economics relative to other patients even at today's current oil prices. We believe that the industry stabilizes and eventually returns to growth we will be well positioned to benefit and deliver higher levels of profitability. During the first quarter as part of our diversification effort of expanding our product lines and entering into new vertical markets our North American manufacturing facility commenced shipping its new chassis product. While we have received quite a bit of positive feedback and interest and expect this new product to ultimately become profitable. We are still in the start base and experienced a standalone adjusted EBITDA loss for the first quarter as compared to positive adjusted EBITDA in the prior year's first quarter. Turning our attention to the Asia Pacific region, we were impacted by lower revenue during the quarter driven by first of all a weaker Australian dollar relative to the U.S. dollar. Secondly, lower revenue from the oil and gas sector and thirdly a generally sluggish moving and transportation sector. This was offset by some positive trends in the quarter such as improved demand in our construction end markets and broad based strength in our New Zealand business. Additionally as a result of disappointing capital expenditures and a focus on working capital management net debt declined by $7 million on a local currency basis from June 30 of 2015. In regard to our company wide outlook based on our first quarter results and our expectations for the value of the Australian dollar versus the U.S. dollar we remain comfortable with the outlook range provided in our fourth quarter and fiscal year 2015 earnings press release and conference call. We stated that the consolidated revenue for fiscal 2015 were expected to be in the range of 225 million to 295 million and that consolidated adjusted EBITDA would be sixteen to 26% lower in fiscal year 2016 from fiscal year 2015. This outlook does not take into account the impact of any current year acquisitions. To conclude we continue to have a number of long term growth opportunities including significantly expanding our North American footprint and strengthening our market leadership position in Asia Pacific region. We will remain disciplined in our capital allocation, deploying our resources and capital where we see healthy demand an opportunity whether it be driven by geography or end market and we will remain active in pursuing accretive acquisitions and greenfield locations with focus on affordable storage container businesses. We have strong operating management both of our geographic venues, a healthy balance sheet and ample financial flexibility. We are diversified by product type customers, end-markets and geography and we believe that we will ultimately overcome the headwinds that we’re facing today. I will now turn the call over the Chuck Barrantes for his financial review.

[Chuck Barrantes:]

Thank you, Ron. We'll be filing our quarterly report on Form 10Q shortly at which time this document will be available on both the SEC EDGAR filing system and on our website. And I encourage investors and other interested parties to read it as it contains the substantial amount of information about our company some of which we will be discussing today. Turning to our financial results total revenues were 63.8 million in the first quarter of fiscal year 2016 as compared to 80.4 million for the first quarter of fiscal year 2015. Leasing revenues of 41.3 million down from 55.7 million in the prior year's quarters, and comprise 67% of total non-manufacturing revenues as compared with 71% for the same period last year. Non-manufacturing sales were 20.3 million in the quarter down from 22.8 million in the first quarter prior year. In our North American leasing operations revenues for the first quarter of fiscal year -- and our North America leasing operations revenues for the first quarter of fiscal year 2016 totaled $37 million compared with $44.8 million for the year ago period, a decrease of 17%. Leasing revenue declined by 24% on a year-over-year basis primarily in the oil and gas sector which dropped 59% however leasing revenues increased and all other sectors by 50% with notable increase from the commercial construction, retail and service sectors. Revenues in our North American manufacturing operations for the first quarter were 2.1 million and in our company revenues to our North American leasing operations were negligible. This compares to $2.2 million of external sales and 12.8 million in the company revenues during the first quarter of fiscal year 2015. While our manufacturing operations were obviously impacted by reduced demand in the liquid containment industry, we have focused on introducing new products and entering into new vertical markets and as Ron mentioned we have recently begun manufacturing to chassis product lines targeted to the North American transportation market. During the first quarter of fiscal year 2016 we recognized approximately $1 million of revenue from this new product line. In our Asia Pacific leasing operations revenues for the first quarter fiscal year 2016 totaled 24.7 million compared to a 33.6 million for first quarter fiscal year 2015, a decrease of 26%. The decline in revenues occurred primarily in the oil and gas transportation and mining sectors partially offset by increases in the construction government and retail sectors and was accompanied by an approximate 22% unfavorable foreign exchange translation between the periods. Consolidated adjusted EBITDA was 13.9 million in the first quarter of 2016 compared to 25.5 million in the first quarter of 2015. Adjusted EBITDA margins as a percent of total revenues was 22% compared to 32% in the prior year's quarter. In North America adjusted EBITDA for our leasing operation was 9.6 million in the first quarter compared with 17 million for the year ago quarter. For our manufacturing operations on a standalone basis adjusted EBITDA was a loss of an approximately $844,000 for the quarter as compared to earnings of 3.1 million in the first quarter of 2015. Asia Pacific adjusted EBITDA for the quarter was 6.3 million as compared to 9.3 million in the year quarter down 32%. On a local currency basis adjusted EBITDA was down 13% from the prior year's first quarter. Interest expense for the first quarter of 2016 was $5 million down from $5.3 million for the first quarter of last year. The decline was driven by a lower interest expense at our Asia Pacific leasing operations being impacted by the translation effect of the weaker Australian dollar relative to the U.S. dollar, In North America reduce interest expense resulting from a lower weighted average interest rate was offset by higher average borrowing on a year-over-year basis. The weighted average interest rate in North America was 4.9% for the quarter of the current fiscal year versus 5.7 in the prior years' quarter. In the Asia Pacific the current period weighted average interest rate was 5.5% for both periods. Net loss attributable to common stock holders in the first quarter of 2016 was $2 million or $0.08 per diluted share versus net income of 3.7 million or $0.14 per share in the first quarter of 2015, both periods include a reduction of $922,000 for the dividends paid on our preferred stock. For the first quarter fiscal year 2016 we generated free cash flow before fleet activity of 20.1 million as compared to 19.3 million in the prior year an increase of 4% as we focus on maintaining stringent expense controls, prudently investing capital resources and managing our working capital. As a reminder we define free cash flow to be cash from operating investing activities. Adjusted for changes in non-manufacturing inventory net lease CapEx and business and real estate acquisitions. For the first quarter the company invested a net 7.6 million in the lease fleet consisting of 5.9 in North America and 1.7 million at the Asia Pacific. This compares to 25.7 million in net fleet investment in the year ago quarter, 24.4 million of which was in North America and 1.3 is in the Asia Pacific. Turning to our balance sheet, at September 30, 2015 the company had total debt of 350.9 million and cash equivalents of 8.7. With a net leverage ratio of 4.7 times for the trailing 12 months. This compares with 356.7 million and 3.7 million at June 30, 2015 respectively with a less leverage ratio 4.2 times. In October we prepared pricing maturity $5 million for the outstanding balance of our term loan with Credit Suisse bringing the balance down to $10 million currently. Receivables are 44.5 million at the end of September as compared to 47.6 million at June 30, Day sales outstanding receivables at September 30, for our Asia Pacific and North American leasing operations improved since June 30 from 40 to 38 days in the Asia Pacific and 60 to 59 days in North America. At the end of September our Asia Pacific leasing operation had in Australian dollars 36 million available to borrow $175 million credit facility. and our North American leasing operations have $42.7 million available to borrow under its $232 million credit facility. Finally we recently experienced some volatility in the market price of our publicly traded non-equity securities. While it is generally our policy not to comment on market activity of any of our publicly traded securities. We felt that in this instance we would make an exception and to eliminate any potential confusion about our ability to meet our financial obligations. We have ample financial flexibility and liquidity in both our North American and Asia Pacific leasing operations as well as at the corporate level. We're in compliance with all our financial covenants on both of our credit facilities and we expect to remain still in the foreseeable future. We have excellent relationships with our senior secured lenders and we do not expect any issues now or in the foreseeable future that would prohibit us from satisfying the interest in dividend requirements on our debt or preferred securities. This now concludes our prepared remarks and I would like to turn the call back to the operator for the question and answer session.

[Operator:]

[Operator Instructions]. Our first question comes from the line of Scott Schneeberger of Oppenheimer.

[Scott Schneeberger:]

Can we start off discussing the -- it looks like clearly this large acquisition and smaller acquisition did you elaborate a little bit on what they are? What they're focus of each one is and what it brings to the table? Thanks.

[Ron Valenta:]

So we continue to focus as we have historically done on acquisitions. Clearly those that are most accretive to us are tuck-ins and then we as well has a list of locations that we'd like to be in that are in good strong market so that the acquisition of that we did at [indiscernible] to our current platform both transactions are creative, the first that we had done which begins at fiscal that we disclosed in our last call was rather small this was a little bit larger but gives us certainly good coverage in some new markets force that we haven't had in the past.

[Chuck Barrantes:]

So Scott the acquisition that we did during the quarter, mobile storage solutions that’s in the Springfield Missouri Area and then the one that we acquired just last month is the Seattle Tacoma area, both acquisitions [indiscernible] outside of the oil and gas sector.

[Scott Schneeberger:]

In the portable storage container could you speak to the pricing environment and the type of conversations that you're having there, is it still a good pricing environment? Could you just -- to last quarter and [Technical Difficulty].

[Ron Valenta:]

Are you talking about acquisition pricing? Are you talking about just rental pricing?

[Scott Schneeberger:]

No I'm on to just rental pricing now for [indiscernible].

[Ron Valenta:]

Okay, so for North America leasing we're seeing in all product lines strength in pricing, as the industry leader continues to increase grades clearly not as high as they had in the past. You know but most recently in the low single digits of 2% to 4% was also what we're seeing. So I think that's what you could expect on the core products.

[Scott Schneeberger:]

And can you talk to, it's touched upon in the press release but still elaborate a little bit more on the end markets where you're seeing some strength and then maybe some verticals that you’re pursuing more so than you’ve in the past?

[Ron Valenta:]

Yes so on the end markets we’re certainly seeing strength on pretty much all sectors especially in the construction site, we’re seeing strength there in North America, in Asia Pacific and we are seeing it and the government signing construction as well.

[Scott Schneeberger:]

And then lastly on Lone Star kind of similar question on pricing in conversations you’re having with your customers obviously it's almost been a year now when you started having conversations with your customers on reduced pricing given the oil prices and it's been certainly prolonged pressure so what type of conversations are you having now obviously still environmental pressure but is there any site towards turning the corner perhaps?

[Ron Valenta:]

Yes I think it looks like prices has stabilized for us, I mean we always got a [indiscernible] here or there but generally speaking it feels like it's stabilized our revenue in that division is about 60% lower than it was in the preceding period. We are seeing good activity in the Permian where it looks like there's more of the players are coming into because of their cost structure is so low. Eagle Ford has stabilized but the Permian seems to show some signs of life or certainly more than Eagle Ford. With our focus on our safety and our systems and our service levels which we haven't cut, we’re beginning to pick up market share in the Permian relative to our prior competitors for those that are still there. And our team they're led by Jodi and Bobby have done a great job in bringing our infrastructure cost down so though we have had an approximate 60% sixty reduction in revenues are a bit of margin actually for the quarter for that division was 40%. So I think that speaks volume to that operating team and how quickly they have moved you know to being albeit with less revenues very profitable So as things begin to turn again with our significant investment in what I just referred to as the three S's you know we wouldn't anticipate certainly the more positive flow through is as things improved, but we’re very happy with the group and what they've done in pretty much short order from quarter to quarter.

[Operator:]

Your next question comes from the line of Brent Thielman of D.A. Davidson.

[Brent Thielman:]

Yes your Pacific revenue obviously down but it kind of appears that the slower rate than what you’ve seen recently I know currency is still headwind but does it feel like revenues to get the balance out as you shift out around that?

[Ron Valenta:]

Yes so once it's not only currency but also you know last year they had some revenues from mining camps that obviously have come back during the last fiscal year so that was unexpected and we generally think that the pricing level there's some upside out there but it will be [indiscernible] pretty much for flat year compared to last year.

[Brent Thielman:]

Okay and then just looking at the consolidated leasing margin, growth leasing margin and picked up from the fourth quarter obviously has been kind of a steady decline throughout last year. Can you just walk me through sort of pieces that helped that stabilize [indiscernible] incremental benefit as we move through the year?

[Ron Valenta:]

Yes so, far as the and you’re talking about sequentially from Q4 to Q2 and you’re talking from -- that’s what you’re talking about quarter to quarter?

[Brent Thielman:]

That’s right. Yes.

[Chuck Barrantes:]

It has moved up sequentially primarily because as Ron had mentioned the pricing at Lone Star has seemed to level off compared to Q4, obviously Q4 we had significant rate adjustments which were on a retroactive basis and that sort of thing. Their rental rates generally across the board have gone up from Q4, Lone Star said it's primarily stable has not really gone up, a little bit more stable. Lone Wolf [ph] is a little bit down because we actually -- they have improved a little bit. So you know it's net-net an improvement from Q4 the only thing that had a tendency to reduce the margin from quarter to quarter was a little bit offset, it was set of frac and as Ron mentioned it's because of the startup of our chassis product line.

[Brent Thielman:]

Okay. And then I guess just lastly it looks like you invested 7.6 million into the last week of this quarter, is that kind of an approximate run rate we could think about this year or is that [indiscernible]?

[Ron Valenta:]

I wouldn’t consider it run rate, so know we invest heavily in the front end of the year as it relates to either to the transport size in Asia Pacific for the retail sector in North America. So I wouldn’t anticipate that being annualized run rate. We usually front load more so than we do back over the year. And again it's all growth CapEx so those are not spec purchases there you know they acquired for replenishing the fleet as we need, as we get to higher utilizations in certain product line. So it's a very disciplined approach to growth CapEx. So we won't be investing in the growth CapEx unless we see the opportunity there. So again I would not anticipate that to be in an annual run rate. I mean if it is would be great because I mean there's more demand. But we don't see that today.

[Operator:]

[Operator Instructions]. There are no other questions at this time. I would now like to turn the call back to Mr. Ron Valenta, President and CEO for any closing remarks. Please go ahead, Mr. Valenta.

[Ron Valenta:]

Yes, thank you. we would like to thank all of you for joining our call today. We certainly appreciate your continued interest in General Finance Corporation and we look forward to speaking to you in the next quarter. Thanks.

[Operator:]

Thank you. Ladies and gentlemen this does conclude today's conference call. You may now disconnect and have a wonderful day.